DBRS Morningstar Comments on Royal Bank of Canada’s Planned Acquisition of HSBC Canada

DBRS Limited (DBRS Morningstar) notes that the Royal Bank of Canada’s (RBC or the Company) planned acquisition of HSBC Bank Canada (HSBC Canada; rated A (high), Under Review with Positive Implications by DBRS Morningstar) has no impact on the Company’s ratings, including its Long-Term Issuer Rating of AA (high) with a Stable trend.

In DBRS Morningstar’s view, the announced all-cash $13.5 billion acquisition makes strategic sense for RBC, as the businesses are complementary and would add $134 billion in assets, $76 billion in net loans, $82 billion in deposits, more than 782,000 customers, and approximately 130 branches. HSBC Canada’s commercial segment includes $39 billion in deposits and globally connected clients (approximately 50%). On the retail side, HSBC Canada has over 770,000 clients, of which approximately 40% are considered affluent and roughly 60% are globally connected. The proposed acquisition continues a trend of prior acquisitions (i.e., City National Bank and Brewin Dolphin Holdings PLC) that have expanded RBC’s affluent and high-net-worth client franchises. RBC’s more robust product set and distribution channels, along with HSBC Canada’s global trade and receivables finance and cash management capabilities, provide opportunities that could boost revenues. The transaction is expected to be immediately accretive with an expected $1.4 billion of fully synergized earnings in 2024. The Company’s pro forma CET1 ratio is expected to exceed 11.5% at closing and HSBC Canada is expected to enhance RBC’s already strong internal capital generation. Lastly, integration risk of this acquisition is considered manageable given that this is a home market transaction with significant footprint overlap and RBC has a strong track record of integrating other acquisitions.

HSBC Canada’s lending portfolio is approximately $76 billion as at September 30, 2022, composed of commercial lending at 52% and retail lending at 48%, with about 75% of loans in British Columbia and Ontario that have performed well over time. The commercial loan book is weighted toward larger commercial loans, with credit quality aligning well with RBC and an immaterial change in RBC’s pro forma real estate business mix. The retail lending portfolio is primarily composed of residential mortgages and has a conservative weighted average uninsured origination loan-to-value ratio of less than 65% and average FICO credit score of over 800. Overall, the gross credit markdown is estimated at $400 million pre-tax, which is 0.5% of HSBC Canada’s gross loans ($300 million allocated to performing loans with expected accretion back over three years).

As part of the transaction, RBC will be purchasing, at par, HSBC Canada’s outstanding preferred shares and subordinated debt. Pre-tax acquisition and integration costs are estimated at approximately $1 billion (25% at close and 75% in year 1). RBC has identified expense synergies of $740 million, equal to 55% of HSBC Canada’s estimated 2024 noninterest expense base. Additionally, a fixed price has been agreed to for the net assets of the business as at June 30, 2022 and, as a result, HSBC Canada’s earnings from June 30, 2022, until the close of the transaction will accrue to RBC (excluding the $90 million dividend paid by HSBC Canada in Q3 2022). The acquisition is expected to close by late 2023, subject to customary closing conditions and required regulatory approvals.

Notes:
All figures are in Canadian dollars unless otherwise noted.

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